Category Archives: Exchange Offer Buybacks

Those of us who’ve been in the financial markets for a number of years have seen Wall Street prices rise and fall periodically. I can’t predict exactly when they’ll rise or fall but I’m certain they will.

Therefore, when stock prices fall across the board, I don’t panic. I know it’s a cycle; prices will rise again eventually.

Also, experience has taught me that when stock prices fall, public companies should once again pull out and dust off for consideration certain time tested corporate actions.

It’s kind of like pulling out the snow gear this time of year. It’s a ritual.

What kind of corporate actions are appropriate to consider when stock prices drop?

My point is that public companies should consider a buyback program and, if appropriate, follow through.

Next, not to be paranoid, but public companies should review their takeover defenses.

Particularly now when big companies are awash in cash and their organic growth has slowed, big companies may see acquisitions as a smart means to get growth by putting their cash to work. Heaven knows, cash earns nothing sitting in the bank.

There’re a number of common takeover defenses, some which vary depending upon the company’s state of incorporation. Common defenses include poison pills, staggered boards, shareholder vote submission and vote threshold provisions.

What I’m recommending here is that a company review with its Board, attorneys, investment bankers and IR professionals just what’s appropriate for the company given its circumstances.

Third, be proactive about M&A.

Rather than sit back and wait for a suitor to call, go ahead, evaluate your competition and all the adjacent players, those companies which are not direct competitors but are nearby. Make sure your analysis includes all the global players too. It’s a very small world now.

For companies operating in several businesses, you really must evaluate each business independently. Who knows, this might even lead to a split-off like that of ITT and Sara Lee.

The goal of this analysis is to determine where there are good fits with your company, where one plus one equals three or more. Even if you don’t immediately act on the analysis, you’re better off knowing the landscape if a suitor calls.

While you’re looking at alternatives, you should consider whether a “go private” or “go dark” transaction makes sense for your company. Unfortunately, for many companies, the cost of being public outweighs the benefits.

I can help your company to consider all these actions in a timely and cost efficient manner .

The McKinsey Quarterly has come out with another interesting article, this time about stock buybacks.

In this article, the authors suggest that most company buyback programs don’t work the way they’re intended, to buy back stock when prices are low.

Most companies end up buying back stock at high prices, not at low prices.

It seems that companies, like many investors, are not good at market timing.

I suppose it’s human nature that companies initiate buyback programs when the company is doing well but the stock price seems to lags the fundamentals.

The irony is that companies typically don’t maintain buyback programs when a company’s situation is less favorable and its stock price has dropped.

The bias, therefore, is to buy back stock only at high prices.

The authors calculated that companies’ buyback programs would have been more successful if applied consistently over time, in good times or bad.

The SEC permits these programs, like 10(b)5 programs, to accomplish what the authors suggest.

I noticed in the article’s footnotes, however, that other academic studies have shown that smaller companies have used one-time purchases, like tender offers, to successfully buy back stock at low prices.

I can help you to evaluate which kind of stock buyback program best fits your company and on setting up the program.

This is the second in a series of posts about how a company can best respond to our current capital markets environment.

Frequently, our clients express their frustration that the equity market is so volatile now that investors seem reluctant to act. Many investors are unsure whether they’ll get a positive return on their investment.

This has driven many to seek out securities with a yield, maybe interest on debt or a dividend on equity.

Seeing this, we’ve come up with a transaction which responds to investors’ current preferences.

We’ve advised companies to offer their common shareholders a new yield-oriented security in exchange for their common.

We’ve tailored the exchange offers to fit our client’s specific circumstances, there are a number of variations available.

The key is that our clients offer what is in great demand, a yield security, in exchange for what seems less in demand, plain common stock.

We’d be happy to discuss this idea with you to determine whether it works in your situation.